MARKET ACTIVITY/ WEEKEND EDITION OF TRADING NOTES JULY 12 1998 (11)
WEEK'S TOP STORIES, Con't
Indonesia Sumatra Gas Pipeline To Start In August
Talisman Energy and Gulf Canada To benefit
Indonesia's mines and energy minister said on Friday state-owned PT Perusahaan Gas Negara's 540-km gas pipeline from the Corridor Block in South Sumatra to the Caltex field would start operating next month.
''The pipeline project is already 99 percent complete at the moment. We expect the gas project will operate officially in the fourth week of August,'' Kuntoro Mangkusubroto told reporters.
Caltex, jointly owned by U.S. energy giants Chevron Corp (CHV) and Texaco Inc (TX), currently uses 60,000 barrels per day (bpd) bpd of crude in direct burning for steam flooding to enhance oil recovery from its Duri field. Caltex plans to switch to gas for this process.
A Caltex official said the Duri field, in central Sumatra, currently produces around 290,000 bpd of crude, including the 60,000 bpd used for direct burning.
''The gas from South Sumatra will save about 60,000 barrels per day of crude from Duri field,'' Kuntoro said.
The pipeline project, which cost $590 million, was designed to flow 300 million cubic feet per day of natural gas to the Duri field.
The project was financed partly by the Asian Development Bank.
Gulf Canada Resources ltd (GOU) has a 54 percent stake in the Corridor Block. Canada's Talisman Energy Inc (TLM) has a 36 percent stake and Indonesian state oil firm Pertamina 10 percent.
A Gloomy Forecast for Oil Producers
Agency Sees Falling Demand Amid Asia Slowdown and Russian Exports
The International Energy Agency on Thursday cut its forecast for global oil demand this year because of ongoing economic turmoil in Asia and a glut of shipments from Russia as that country struggles with its own economic problems.
The agency cut its demand forecast for this year by 100,000 barrels a day, to 74.9 million barrels a day.
''Demand is heading one way this year, and that's down,'' said Gareth Lewis-Davis, an analyst at the agency, which is based in Paris. ''What the producers must be hoping for is a hot summer and a cold winter to ramp up demand and encourage prices.''
London Brent crude oil futures were trading at $13.25 per barrel late Thursday, down about 30 percent from a year ago.
A deterioration in the Russian government's finances has forced the country to pour more oil into glutted markets in the West in recent months, the International Energy Agency said in its Monthly Oil Market Report.
Net oil exports from the former Soviet territories, mainly Russia, hit 3.1 million barrels daily in May, a record for post-Soviet times, the agency said.
''The Russian government is determined to collect taxes,'' the agency said, ''leaving cash-strapped oil companies to turn to high exports for hard currencies.''
Lower demand than expected as the Asian crisis cuts the region's demand for oil, coupled with a warmer-than-expected Northern Hemisphere winter and rising global production also have increased the amount of oil on world markets and may delay oil producers' attempts to increase prices.
Rising Russian exports come despite Moscow's pledge to play its part in an effort by oil exporters to revive prices by cutting supplies. Producers from the Organization of Petroleum Exporting Countries agreed in June with non-OPEC nations on a second round of output cuts in the space of three months.
OPEC agreed cuts totaling 2.6 million barrels a day from the 75 million-barrel daily market, and the non-OPEC suppliers Mexico, Norway and Oman chipped in with their own supply cuts. But the output reductions will take some time to make an impact on the market.
''It may be the fourth quarter before stockpiles are sufficiently eroded to allow oil prices to rise,'' said David Knapp, chief analyst at the agency.
The agency said that if OPEC honored its pledges to cut output, the group would likely be producing an average of 26.49 million barrels a day by the third quarter. That compares to the 27.95 million barrels a day the agency estimated OPEC produced in June.
The reduction in OPEC's output would help reduce the glut because the agency predicts the world will demand an average of 27 million barrels a day of crude from the group, which supplies about a third of the world's oil.
The International Energy Agency is an autonomous organization, established in 1974 within the framework of the Organization for Economic Cooperation and Development, and is the forum for coordinating the energy policies of 23 industrialized nations.
Oil Exploration Spending Rise Seen Smaller In 1998
Capital spending by oil and gas companies on exploration and production is set to rise 6.2 percent globally, according to Salomon Smith Barney, down from a projected 11 percent growth survey at theend of 1997.
The mid-year study showed that international exploration and production spending would rise nearly 14 percent, thet the U.S. would be flat this year and that Canadian spending would drop by nearly 12 percent.
''The 1999 outlook is unusually uncertain, but 50 percent of respondents plan increases,'' analyst Geoff Kieburtz said in a report.
Shakeout In Intermediates Kindles Juniors' Hopes
The Financial Post
The dwindling ranks of intermediate Canadian energy firms probably mean more competition for survivors and increased investor interest in juniors, observers say.
The latest, but probably not the last, intermediate to lose its independence was Pinnacle Resources Ltd. Bidder Renaissance Energy Ltd. said yesterday it won about 95% of the common shares in its share exchange takeover offer, announced June 8. It offered 0.66 of a share for each Pinnacle share and about 38.7 million shares were tendered.
One analyst, who asked not to be named, picked Barrington Petroleum Ltd. and Crestar Energy Inc. as other strong takeover candidates in the sector.
Pinnacle joins a growing list of mid-sized companies taken over by larger U.S. or Canadian competitors in the past year. They include Archer Resources Ltd., CS Resources Ltd., Dorset Exploration Ltd., Elan Energy Inc., Stampeder Exploration Ltd. and Tarragon Oil & Gas Ltd.
Canadian firms, such as Renaissance, hope management and operating synergies will allow them to raise oil and natural gas production while cutting costs. U.S. companies are taking advantage of a strong US$ to increase access to Canadian gas, which is expected to rise in value as new pipelines are built.
Some of the targets, such as CS and Stampeder, had heavy oil developments that were in hot demand last year when crude prices were strong. Others, such as Elan, were known for their technology knowledge. This exploration and production expertise made them attractive targets.
Company names change, but the need to develop technology that cuts costs and boosts efficiency will not be altered by the increased U.S. presence north of the border, said Verne Johnson. The former president and chief executive of Elan, who now heads consultancy Ziff Energy Group in Calgary, said new owners' asset rationalizations and sales by cash-strapped rivals suffering from low oil prices are setting the stage for a resurgence of mid-sized players.
"This recent evolution -- the change of ownership and turnover of companies -- it's just going to set up a wave of juniors who will be the intermediates in two or three years."
The resources large U.S. players bring to Canada may increase competition for property and skilled staff, and put more pressure on surviving intermediates, said John Ferguson, vice-president and chief financial officer of Poco Petroleums Ltd.
The company is hiring several people with doctorates to develop exploration ideas and technology over the next few years. He said Poco is attracting a following from U.S. analysts. It's difficult to tell whether this is a result of less competition or recognition of Poco's focus on gas.
George Fink, chairman of the Small Explorers & Producers Association of Canada, said investor interest will probably trickle down and benefit his members. "If those intermediates disappear, [investors] generally go to a smaller one and hope it grows and reaches that size rather than going to a major."
Analyst Peter Linder, with CIBC Wood Gundy Securities Inc., picked Bonavista Petroleum Ltd., Genesis Exploration Ltd. and Probe Exploration Inc. as juniors with potential to evolve into intermediates.
Catch-22 Time In The Gas Patch
Globe & Mail
It's a funny thing about the so-called oil patch these days -- you'd be hard pressed to find any oil companies in it. Dozens of companies took part in the recent Canadian Association of Petroleum Producers (CAPP) conference, but not one of them appeared to be an oil company. They were all natural gas companies, or claimed to be on their way to becoming gas companies.
Even producers that eight or nine months ago were crowing about the fact that they were heavy oil companies have become natural gas companies. Perhaps Baytex Energy chief executive officer Dale Schwed said it best at the CAPP conference when he said his company "is not a heavy oil company, as we have been accused of being -- we have the potential to become a heavy oil company."
This was a heroic attempt to distract the stock market's attention away from the fact that Baytex paid $267-million for heavy oil producer Dorset Exploration last September, just as the price of crude oil -- and the corresponding price of heavy oil -- was tanking. So where is Baytex focusing its energies now? Why natural gas, of course.
The fact that companies are desperately trying to twist, manoeuvre and otherwise transform themselves into natural gas companies is hardly surprising. No one in their right mind wants to say they're focusing on oil, since the price hasn't budged from the $14.50 (U.S.) level despite OPEC's efforts. But moving to natural gas isn't as easy as just saying you're a gas company.
FirstEnergy Capital analyst Martin Molyneaux explained why last week during a discussion of his firm's comprehensive survey of the industry's "finding and development" costs. Those are all the costs that go into producing a barrel of oil or the equivalent amount of natural gas (the current standard is that 10,000 cubic feet of gas is equal to one barrel of crude oil).
The current environment has companies caught in a Catch-22 squeeze, Mr. Molyneaux said. The price of natural gas is rising, largely because of the prospect of increased pipeline capacity to the United States, where prices are higher, and everyone wants to increase their gas production as quickly as possible. But moving from oil to natural gas production can't be done overnight.
Much of the natural gas that remains to be discovered in the Western Canadian sedimentary basin is located in the southwestern Foothills area of Alberta and across the border into British Columbia, analysts say. And most of those natural gas "pools" are extremely deep formations -- meaning they require specialized drilling rigs that can dig deeper than the traditional oil well.
These double-and triple-height rigs are far more expensive than traditional drilling rigs, and are likely to become even more so as demand for them increases, Mr. Molyneaux added. Partly because of these kinds of costs, and partly because deep natural gas deposits are more risky, companies are likely to see costs increase as they try to move into gas.
That's where the squeeze comes in. The whole reason companies are moving to natural gas is because there just isn't the cash flow available from oil to make it economically attractive -- and yet that same lack of cash flow is going to make it harder for companies to undertake the kind of expensive exploration and production that a lot of natural gas requires.
"The golden goose is gas, and everyone is in the starting gate ready to go after it," Mr. Molyneaux said. "But they've got an 80-pound anvil tied to their right ankle, and that's a sub-$15 oil price."
Companies that are already oriented toward natural gas are looking like geniuses at the moment, of course -- companies such as Rio Alto Exploration , Alberta Energy , anadian 88 Energy , Newport Petroleum and Encal Energy . Those whose primary focus is oil include Pacalta Resources (whose exploration is based in Ecuador), Canadian Occidental and Renaissance Energy .
A company such as Pacalta, mind you, is rescued by the fact that its costs are much lower than other companies -- about $1.61 (Canadian) a barrel of crude, compared with an industry average in 1997 of $6.77. Companies such as Cabre Exploration and Numac Energy, however, have a harder time because they are more leveraged to oil but have relatively high costs, about $10 a barrel.
Some of the larger companies, such as CanOxy, Imperial Oil and Ranger Oil, have the kind of balance sheet stability and breadth of operations that makes it easier to withstand a sustained downturn in oil prices, Mr. Molyneaux said. But some of the medium-sized and smaller companies -- especially those whose debt is on the high side -- are likely getting nervous.
"With 11 years in the business, I've never seen producers sweat like they are now," the FirstEnergy analyst said. "There's a lot of guys lying there staring at the ceiling, and thinking about selling or finding a partner." Medium-sized companies will be hardest hit, he said. "The big guys have the wherewithal to get by, and the smaller guys are more flexible."
COUNTRIES IN THE NEWS
Yemen Says Oil Pipeline Attacked But Still Working
SANAA, July 11 - Yemeni tribesmen said they had set ablaze a crude oil pipeline in the oil-rich Marib region, but an oil ministry official said on Saturday the pipeline was operational.
Tribesmen staged the attack on Friday in an area called Kofal near a pumping station and next to a military camp, tribal leaders said.
They said the pipeline, which carries oil from Marib to the port of Ras Isa, burst into flames as a result of the attack.
An oil ministry official said there had been a small attack, but said the pipeline's flow was not disrupted. "It is still operating, no problem," the official told Reuters by telephone.
The pipeline with an average throughput of 145,000 to 150,000 barrels per day (bpd) had suffered minor damage from earlier attacks by tribesmen, but continued operating.
Hunt Oil, a U.S. oil company working in the country, said on June 29 the pipeline had been punctured by bullets from tribesmen protesting against a government decision to raise food and fuel prices. It said the amount of oil which leaked at the time was negligible.
Officials from Hunt Oil in Yemen had no immediate comment on the latest reported attack.
Earlier this month, residents reported an explosion at a bunker fuel pipeline in the southern port of Aden, but officials said the blast had been caused by a percussion grenade causing no damage.
Demonstrations by tribesman and other protesters erupted in Yemen when the government decided to raise the price of fuel and some basic foods by up to 40 percent on June 19 as part of economic reforms implemented with the backing of the World Bank and International Monetary Fund.
Yemen is an independent oil producer, which pumps about 380,000 to 390,000 bpd of crude.
Conoco Has Big New Nigeria Oil Find
LAGOS, July 10 - American oil firm Conoco has struck a huge oil field in Nigerian deep waters, a local newspaper reported on Friday.
The independent Guardian said the new field named "Chota" contained 200 million barrels of crude oil but added that the company was playing down its significance.
"They only announced that it was a commercial discovery. But we think it is about 200 million barrels," it quoted an oil industry official as saying.
It said the find had created renewed interest in the country's ultra-deep water basin.
Other multinational companies active in deep offshore exploration in Nigerian waters include Royal/Dutch Shell, Mobil Corp, Elf Aquitaine Agip SpA and a BP Statoil joint venture.
Russia Urges Compromise Over Caspian Sea Division
MOSCOW (July 10) XINHUA - The Caspian Sea's littoral countries should make compromise over dividing the vast oil reserves under the seabed, Russian presidential spokesman Sergei Yastrzhembski said Thursday.
Yastrzhembski highly spoke of the agreement Russia and Kazkhastan signed Monday on the line of their borders under the northern Caspian Sea.
On the rejection of the agreement by Iran and Turkmenistan, the Russian presidential spokesman said that there is difference on the issue between the five countries bordering the sea.
Russian Deputy Foreign Minister Boris Pastukhov will travel to Iran to hold talks with the Iranian government on the issue, he said.
Iranian President Mohammad Khatami and Turkmenistan President Saparmurat Niyazov issued a joint statement on Wednesday, demanding that all the five states should get an equal share of the resources under the Caspian Sea.
The statement, issued in Ashkhabad, capital of Turkmenistan, said that the Russia-Kazakhstan agreement created obstacles in the way of reaching consensus on the status of the Capsian Sea among the five countries.
Iran, no longer opposed to dividing the sea, lined up with Turkmenistan, agreed to divide both the seabed and the water body into five parts -- one part for each country, but leaving the central part of the sea under the common control of all the five countries.
Niyazov has reportedly planned to propose a Caspian Sea summit meeting in this fall to coordinate positions on the issue.
The Caspian Sea, the largest inland sea in the world, is thought to have the third greatest oil reserves after those of the Gulf and Siberia, equivalent to 13-15 billion tons.
Shell Set To Drill Off Falklands
LONDON, July 9 - The Borgny Dolphin rig drilling off the Falkland Islands has been transferred to Royal Dutch/Shell after Lasmo Plc failed to strike oil, company officials said on Thursday.
Shell is licensed to drill in tranche B, east of tranche A, where Amerada Hess abandoned a well in May after finding traces of hydrocarbons but not in commercial quantities. Amerada Hess, the first company to drill off the Falklands, began its programme in late April.
Lasmo spokesman Roy Beadle said his company's well in tranche C had proved dry, but added, "There are still grounds for optimism and we will continue to monitor subsequent wells being drilled by other companies."
A total of 12,800 square km, divided into seven tranches, have been licensed for drilling north of the Falklands in one of the world's last unexplored basins.
After Shell, the next company to drill will be Sweden's Lundin Oil AB, after which the rig reverts to Amerada Hess.
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